China’s Cooling Smartphone Market Creates Zero-Sum Web Game

(Bloomberg) -- Hi folks, it's Shelly Banjo. Raise your hand if dollar signs pop into your mind when thinking about China’s 1.4 billion consumers. That was certainly true for mobile-phone makers in the 1990s and until 2012, when the country surpassed the U.S. to become the world's largest smartphone market.

Now, basically everyone in China has a phone. That amazing China mobile growth story? Yea, that's over. And it's going to have a much bigger impact on China's tech industry than many people realize.

First, the numbers: China's smartphone shipments sank 21 percent in the first quarter from a year earlier, to 91 million units, a number last seen in 2013, according to researcher Canalys. Nowhere is the pain as acute as it is for Samsung, whose market share plummeted to 1 percent from 20 percent just four years ago, according to IDC. Consolidation is afoot as the market shifts from open pastures of first-time buyers to a fierce land grab by manufacturers now forced to raise prices just to squeeze out growth. Mo Jia, analyst at Canalys, calls it “smartphone maker fatigue.”

What’s less obvious is how the new dynamics will play out in a sector built on surging demand for mobile phones. While manufacturers have a bit of a reprieve as consumers in India, Southeast Asia continue to buy smartphones, the bigger question is what will happen to China’s internet giants, which will have to work harder to win and keep consumers. 

Tencent, for example, owes its fortunes to smartphones. Where would its lucrative mobile games business and WeChat’s billion users be without the gadgets? Without new users, it’s had to shift its approach to convincing existing customers to spend more time on its platform. It’s also busy acquiring and investing in other companies rather than developing in-house products, prompting critics to ask: “Has Tencent lost its dream?

Ditto for Alibaba, which warned investors last week its profit profile is bound to change, because it’s pretty much saturated China’s online shopping market and is now depending on things like reaching shoppers in physical stores to fuel growth. 

But perhaps the biggest challenge will come for small upstarts trying to break past these giants. For one, to acquire new customers these startups have little choice but to pay Baidu, Alibaba and Tencent hefty fees just to find eyeballs,  given that these three giants control two-thirds of the digital ad spending in China. And those rates are sizable. It can cost web companies anywhere from $17 to $54 to acquire a new customer, according to iResearch. 

During a recent trip to Shanghai and Beijing, hawkers were handing out leaflets with QR codes on almost every corner, trying to convince users to try out new apps or services. It’s a decidedly old-school way of reaching new users, but with climbing online ad costs and cheap labor rates, promotions printed on paper start to make sense.

With the easy wins already notched and smartphone growth slowing, you can expect profitability to decline for the big internet companies, while an intense battle brews among upstarts looking to grab market share. These are just some of the symptoms as the world’s biggest smartphone market cools. 

This article also ran in Bloomberg Technology’s Fully Charged newsletter. Sign up here.

And here’s what you need to know in global technology news

Jack Ma’s finance giant Ant Financial finds itself under close scrutiny.  With more than 870 million customers, and services including online payments, insurance, lending, credit scores and asset management, China’s policymakers are starting to wonder if it poses a systemic risk to the economy.

Qualcomm is exiting servers. Wait, Qualcomm was into servers? The biggest mobile chipmaker is conceding that it won’t be able to loosen Intel’s grip on the market anytime soon.  

Can tablets be sexy again, at least for octogenarians? Consumer Cellular is betting that its success in selling mobile phones to senior citizens will translate well into tablets for them. Hence, the GrandPad

Amazon and NASA are teaming up. They’re looking into how to manage drone and airplane traffic in France.

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